The Review of Austrian Economics

, Volume 21, Issue 4, pp 283–300

Monetary policy as bad medicine: The volatile relationship between business cycles and asset prices

Article

DOI: 10.1007/s11138-008-0042-8

Cite this article as:
Bagus, P. Rev Austrian Econ (2008) 21: 283. doi:10.1007/s11138-008-0042-8

Abstract

Austrian business cycle theory has become an important point of focus in controversial mainstream discussions regarding the role of asset prices in monetary policy. In this article, the relation between asset prices and the Austrian business cycle theory is examined. The analysis focuses on how central banking supports optimism, resulting in the redirection of entrepreneurial activity and knowledge via asset price bubbles. The crucial role of credit expansion for asset price booms is also analyzed. Following this analysis, the implications for monetary policy are deduced.

Keywords

Austrian business cycle theoryAsset pricesAsset price bubblesMonetary policyCredit expansionHerding behavior

JEL codes

B53 — Austrian EconomicsE32 — Business CyclesE44 — Financial Markets and the MacroeconomyE58 — Central Banks and their Policies

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Department of Applied Economics IUniversity Rey Juan CarlosMadridSpain